Customer acquisition cost (CAC) refers to the accumulated spending incurred, and resources used to gain a new customer. The CAC is an important metric used to determine business health and to improve return on investment and profit margin. It is usually measured alongside customer lifetime value (LTV), another important metric that measures the value of a shopper in their entire lifetime as a customer. Together, these two help brands and retailers allocate their expenses more effectively for the sake of company growth.
To calculate CAC, you will have to take the marketing expenses and divide them by the number of newly acquired customers in a certain period. The expenses entail advertising costs, salaries, equipment, and software purchased, consultations, sponsorships, and price discounts. You can assign each marketing effort its own CAC.
Why is CAC Important?
Understanding the customer acquisition cost and what it means to the business is important for any brand to succeed. For one, it helps improve return on investment. When the CAC is determined, businesses can allocate their budget more effectively to acquire new customers. Understanding the CAC can also boost profit margins because brands can analyze the value of each customer with a clearer picture.
The CAC is also directly linked to profitability because it gives consideration to revenue. It provides a complete view of what a brand gains in all the parts of the funnel.
Ideally, the customer acquisition cost should not be higher than the customer lifetime value. If that is the case, then the business is not practical, and the acquisition teams are not profitable.
How to Improve your Customer Acquisition Cost
Here are some actions you can implement to have a more desirable number for your customer acquisition cost:
- Perform A/B testing. You can identify areas where you lose your customers’ interest or where they abandon the shopping cart. Brands can also improve the homepage and other landing pages, site responsiveness, and other factors to provide a better eCommerce experience.
- Remove frictions across the customer journey. Make the shopping experience as smooth and seamless as possible. You can do this by providing organized and intuitive navigation, suggesting only the most relevant items with product recommendation engines, and streamlining the checkout process. If possible, engage shoppers early on in the customer journey to lower your CAC.
- Add features that would be of value to customers. It can be in the form of blogs with valuable content, loyalty programs, mailing lists, surveys, among others, that can prompt customers to check and engage more with your brand.
Navigate through the letters to explore the glossary terms